Over the past 12 months, the U.S. Dollar Index has only gone up by 3 percent. During the same period, bitcoin has surged by a whopping 363 percent. What is behind this rally – and will it last?
First, a definition: Bitcoin is a global digital currency created in 2009. From an online bitcoin account, buyers and sellers can transact directly and immediately, avoiding financial institutions, credit card companies, regulatory authorities, credit checks or revealing personal information. Key to this is “block-chain” technology, a decentralized online ledger that tracks every single transaction. Block-chain is considered largely hack proof and it has many possible applications beyond cryptocurrency.
The chart below shows that bitcoin's value started climbing since around the end of last year. Part of this started with speculative moves out of China where investors wanted to take money out of China into foreign currencies but could not due to central bank restrictions.
Bitcoin has gone on to rally substantially since April, when Japan recognized it as a legal form of payment. Now “Mrs. Watanabe,” a popular slang term for Japanese housewives who take on the risk of currency trading, is more interested in bitcoin than in owning other investments, as they see the global political and economic climate as uncertain. In recent months, investors and pensioners from South Korea and India have also joined the trend, buying similar cryptocurrencies.
Originally, many financial professionals dismissed the idea of digital currencies like bitcoin. They are not circulated under any central bank supervision, the money supply is not controlled, there is no regulation and their intrinsic value is hard to determine.
Darker worries exist about bitcoin being used for money laundering, using false identities, tax evasion and drug and terrorist financing. Because rules and regulations have not kept pace, bitcoin investors are not protected. Recently, South Korean authorities reported a $55 million scam involving bitcoin that was based on a pyramid scheme, victimizing thousands.
My View: The positive attributes of cryptocurrencies are speed, secure transfer and storage of value, limited personal data, supported by the block-chain technology. These attributes, however, also carry the negative risks mentioned above. Digital currencies are still in an experimental stage, resulting in huge volatility. Given this infancy, we hope that "Mrs. Watanabe" and friends will study and weigh out the positive versus the negative attributes to determine the true intrinsic value of bitcoin.
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